We expect a slightly dovish tone from Mario Draghi at this week's ECB meeting, as the main message should be that the ECB is on autopilot with its current monetary policy. Draghi has recently said 'a reassessment of the current monetary policy stance is not warranted at this stage' and we expect him to reiterate this, which should be perceived as dovish.
Following the latest ECB meeting, speculation about the sequencing of the ECB's exit from the very accommodative monetary policy increased and a month ago the market priced a 10bp deposit rate hike this year. Now the pricing of the hike has been postponed to late 2018, after prominent ECB members expressed a dovish view, thereby dampening market participants' expectations. In our view, the recent dovish tone reflects the ECB's perception of the pricing of hikes as a tightening of the financial conditions, which it considered as unwarranted.
Despite the expected dovish communication at the upcoming meeting, we believe the ECB could change its forward guidance on policy rates at the meeting in June. However, there is a risk that the ECB will also take a more cautious approach at the meeting in June, as Draghi has recently said 'Before making any alterations to the components of our stance - interest rates, asset purchases and forward guidance - we still need to build sufficient confidence that inflation will indeed converge to our aim'. We still believe the ECB will announce an extension of its EUR60bn monthly QE purchases at the September meeting and hence continue the purchase programme in 2018.
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